Question

Dan Watson started a small merchandising business in Year 1. The business experienced the following events during its first year of operation. Assume that Watson uses the perpetual inventory system. Acquired $32,500 cash from the issue of common stock. Purchased inventory for $26,000 cash. Sold inventory costing $15,500 for $32,000 cash. Required a. Record the events in general journal format. b. Post the entries to T-accounts. c. Determine the amount of gross margin. d. What is the amount of net cash flow from operating activities for Year 1?

Answer 1

Answer:

The Journal entries, T-accounts, Income Statement, and Cash flow from Operating Activities are given below as explanation;

Explanation:

Requirement A) Journal Entries

1. Cash                           32,500

         Common Stock              32,500

2. Inventory                   26,000

          Cash                               26,000

3. Cash                          32,000

           Sales Revenue              32,000

4. Cost of goods sold   15,500

           Inventory                       15,500

Requirement B) T-accounts

See attached image for this requirement. The Left side represents Debit and the right side represents Credit.

Requirement C) Income Statement

                         Dan Watson

                    Income Statement

       For the year ended, Dec 31, 20X1

Particulars                                            $

Sales                                                32,000

Less: Cost of goods sold               (15,500)

Gross Margin (Profit)                       16,500

Requirement D) Cash flow from operating activities

First, we have to find out, the net income.

Gross Margin                            16,500

Less: Operating Expenses             (0)

Net Income                               16,500

Therefore, the cash flow from operating activities (O.A):

Net Income                        16,500

Add:

Decrease in Inventory

(26,000 - 10,500)              15,500

Net Cash flow from O.A   32,000